Health Check: How Prudently Does Magnachip Semiconductor (NYSE:MX) Use Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Magnachip Semiconductor Corporation (NYSE:MX) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Magnachip Semiconductor

What Is Magnachip Semiconductor's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Magnachip Semiconductor had debt of US$30.3m, up from none in one year. But on the other hand it also has US$151.1m in cash, leading to a US$120.8m net cash position.

How Healthy Is Magnachip Semiconductor's Balance Sheet?

We can see from the most recent balance sheet that Magnachip Semiconductor had liabilities of US$50.3m falling due within a year, and liabilities of US$61.4m due beyond that. On the other hand, it had cash of US$151.1m and US$34.0m worth of receivables due within a year. So it can boast US$73.3m more liquid assets than total liabilities.

This surplus strongly suggests that Magnachip Semiconductor has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Magnachip Semiconductor boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Magnachip Semiconductor can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Magnachip Semiconductor made a loss at the EBIT level, and saw its revenue drop to US$220m, which is a fall of 8.6%. We would much prefer see growth.

So How Risky Is Magnachip Semiconductor?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Magnachip Semiconductor had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$30m of cash and made a loss of US$44m. But the saving grace is the US$120.8m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 2 warning signs we've spotted with Magnachip Semiconductor (including 1 which can't be ignored) .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.